Russian President Dmitry Medvedev has said Ukraine's economy will face "sanctions and demands" from Russia if Kyiv does not pay off its gas debt.

Medvedev's remarks came as the state-controlled gas giant Gazprom warned Ukraine it would cut gas deliveries on January 1 if new contracts were not signed for 2009.

Speaking to Russian television on December 24, Medvedev said: "It is impossible to go on like this. Let them pay the money."

Medvedev did not say what sanctions Moscow could use against Kyiv, but warned that it had a "whole arsenal of possibilities" at its disposal.

Gazprom says Ukraine owes the company more than $2 billion, including $805 million for November, $862 million for December, and $450 million in penalties for late payment.

Gazprom spokesman Sergei Kupriyanov told journalists on December 24 that Ukraine's state gas company Naftogaz told Gazprom officials that they wouldn't be able to pay the debt.

"Well, they have paid for October at last. But for November and December it is obvious that they will not pay. It was confirmed again during the meeting [on December 24] that for gas supplies in November and December, Naftogaz with not be able to pay in cash," Kupriyanov said.

Ukrainian President Viktor Yushchenko earlier in the day said the sides had agreed to restructure the debt over several months, and that Kyiv may return some gas held in storage to Gazprom.

But Kupriyanov said the question has not been solved as was announced in Kyiv.

He also said the dispute with Ukraine had reached a "critical" stage.

"If there is no contract signed for gas supplies to Ukraine in 2009 then we will not be able to supply gas without contract on January 1," Kupriyanov said.

Tough Times

Ukraine, which has been hit hard by the global financial crisis, currently pays Russia $179.5 for 1,000 cubic meters of gas.

But Gazprom has warned that price could rise to $400 for 1,000 cubic meters from next year.

Despite the ongoing dispute, both Moscow and Kyiv offered assurances that gas deliveries to European consumers would not be disrupted.

"There are legal grounds and technical capacity to ensure gas transit through Ukrainian territory for our European consumers in full volume," Kupriyanov said.

And President Yushchenko said supplies to Europe would be uninterrupted, as Ukraine still has gas reserves.

The European Union gets more than 40 percent of its gas imports from Russia, mostly via pipelines across Ukraine.

A previous dispute in the winter 2006 disrupted Russian gas supplies to several EU countries.